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What You Need to Know About SIVs

Editor's note: Ask TheStreet is designed to answer questions about the market, terms, strategies and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment- or stock-related advice.

What is a SIV? Does the SEC regulate SIVs? -- R.P.

Recently, everyone's been talking about SIVs. So what are they all about and what's the big deal?

The letters S-I-V stand for
structured
investment vehicle. SIVs have been in the news a lot in connection with the
credit
crunch and
subprime mortgage blowup
.

SIV Defined

An SIV is a type of complex
bond
market investment, which was originally created to help banks finance low-risk assets such as credit card loans, explains Ken Hackle, managing director of
fixed-income
strategy at Greenwich Capital in Greenwich, Conn.

To set up a SIV, banks borrow cash by selling
commercial paper
to investors and then use the proceeds to purchase bundles of high-quality loans. Commercial paper is like a
Treasury bill
in that investors buy it at a
discount
from its
face value
and expect to hold it for 30, 60 or 90 days, at which point the investor gets back the full face value of the
note
.

Historically, since the underlying assets of the SIV -- the credit card balances, home mortgages, car loans and student loans -- were relatively low-
risk
, they also had very low
profit margins
. And because of the low
profitability
relative to
assets
, banks wanted to keep the loans off their
balance sheets
, Hackle says.

The Rise and Fall of SIVs

Some bankers decided the low profit margins of SIVs were inadequate and looked for ways to boost
returns
. One way to do that was to buy riskier borrowings, such as
home-equity loans
. And for a while, it worked.